Form 10-QSB
[As last amended in Release No. 34-38850, July 18, 1997,
effective September 2, 1997, 62 F.R. 39755]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to _________
0-23545
Commission File Number
Jreck Subs Group, Inc.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1317674
(state or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
2101 West State Road 434, Suite 100, Longwood, Florida, 32779
(Address of principal executive offices)
(407) 682-6363
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the post 90 days. Yes X No
-----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the most recent practicable date: July 31, 1999 -
27,596,602 Shares
Transitional Small Business Disclosure Format: Yes___ No X
1
<PAGE>
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
Jreck Subs Group, Inc.
Consolidated Balance Sheet
March 31, 1999 (Unaudited) and December 31, 1998
ASSETS
March 31, 1999 Dec. 31, 1998
-------------- -------------
Current Assets:
<S> <C> <C>
Cash & Cash Equivalents $ 248,534 $ 310,578
Accounts Receivable-Trade, net of allowance of $157,000 377,610 398,755
Current Portion of Notes Receivable 398,778 398,778
Prepaid Expenses 512,880 650,215
------------ -----------
Total Current Assets 1,537,802 1,758,326
Property & Equipment-Net 806,115 820,722
Other Assets:
Notes Receivable 102,410 159,182
Excess of Cost Over Fair Value of Assets Of Net Assets Acquired 10,827,881 11,102,937
Covenants Not To Compete & Other Intangible Assets 272,959 318,961
Deferred Loan Costs 434,064 433,155
Other 110,817 114,571
------------ -----------
Total Assets $ 14,092,048 $14,707,854
============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Debt $ 2,500,000 $ 2,003,198
Accounts Payable 764,832 1,002,109
Accrued Expenses 806,286 708,759
Accrued Preferred Dividends 217,331 201,540
----------- -----------
Total Current Liabilities 4,288,449 3,915,606
Long Term Debt-Related Parties 363,339 363,339
Other 1,002,031 1,511,642
----------- -----------
Total Liabilities 5,653,819 5,790,587
Redeemable Common Stock 593,000 593,000
Stockholders' Equity:
Preferred Stock:
Series "C" Convertible Preferred Stock, no par value,
120 shares authorized, issued and outstanding 120,000 120,000
Series "D" Convertible Preferred Stock, no par value,
2,500 shares authorized, 2,030 and 2,350 shares
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively 3,384,719 3,918,271
Series "E" Convertible Preferred Stock, no par
value, 135 shares authorized, 20 and no shares
issued and outstanding, respectively 200,000 0
Common Stock, no par value, 50,000,000 shares authorized,
22,162,129 and 19,503,596 shares issued and outstanding,
respectively 26,764,242 26,225,338
Accumulated Deficit (18,436,232) (17,751,842)
Less Stock Subscription Receivable (4,187,500) (4,187,500)
----------- -----------
Total Stockholders' Equity 7,845,229 8,324,267
----------- -----------
Total Liabilities & Stockholders' Equity $14,092,048 $14,707,854
=========== ===========
</TABLE>
The interim financial statements include all adjustment which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
2
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Statement of Operations
Quarters Ended
March 31, 1999 and 1998 (Unaudited)
Quarter Quarter
Ended Ended
March 31, 1999 March 31, 1998
------------------ ------------------
Revenues:
<S> <C> <C>
Continuing Royalties $ 632,508 $ 547,141
Initial Franchise & Transfer Fees 17,459 50,700
Retail Store Sales-net 0 531,597
Bakery Operation Sales-net 160,079 250,421
Other 140,781 175,441
------------- -------------
Total Revenue 950,827 1,555,300
Cost of Retail Sales 162,409 308,542
General and Administrative 854,642 975,782
Conversion Penalty on Series "D" Preferred Stock 0 718,272
Consulting and Investor Relations 185,738 770,049
Interest 135,947 66,317
Depreciation & Amortization 213,235 267,422
------------- -------------
Total Expenses 1,551,971 3,106,384
------------- -------------
Operating Loss (601,144) (1,551,084)
Loss on Disposal of Assets 39,606 0
------------- -------------
Net Loss (640,750) (1,551,084)
Preferred Stock Dividends 43,640 53,900
------------- -------------
Net Loss Applicable to Common Stock $ (684,390) $ (1,604,084)
============= =============
Weighted Average Common Shares Outstanding 20,375,969 14,465,764
============= =============
Loss per Share $ (0.03) $ (0.11)
============= =============
</TABLE>
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not
misleading.
3
<PAGE>
<TABLE>
<CAPTION>
Jreck Subs Group, Inc.
Statement of Cash Flows
Quarters Ended
March 31, 1999 and 1998 (Unaudited)
Quarter Quarter
Ended Ended
March 31, 1999 March 31, 1998
------------------ ------------------
Operating Activities:
<S> <C> <C>
Net Loss $ (640,750) $ (1,551,084)
Non-Cash Expenses Included in Net Income:
Depreciation & Amortization 213,235 267,422
Amortization of Prepaid Interest 88,174 11,480
Loss on Disposal of Assets 39,606 0
Amortization of Prepaid Consulting Fees 135,738 0
Consulting Fees Paid in Common Stock and Options 0 345,230
Conversion Penalty on Series "D" Preferred Stock 0 718,272
Adjustments to Reconcile Net Loss to Cash
Provided (Consumed) by Operating Activities:
Decrease in Accounts Receivable 21,145 91,528
(Increase) Decrease in Prepaid Expenses (62,042) 163,322
Decrease in Accounts Payable & Accruals (99,261) (975,372)
------------- -------------
Cash Used in Operating Activities (304,155) (929,202)
Financing Activities:
Proceeds From the Sale of
Series "D" Preferred Stock 0 1,817,490
Proceeds From the Sale of
Series "E" Preferred Stock 200,000 0
Payments on Long Term Debt (13,154) (597,196)
Proceeds of Long Term Debt 0 200,000
Dividends Paid 0 (13,232)
------------- -------------
Cash Generated by Financing Activities 186,846 1,407,062
Investing Activities:
Advances Made on Notes Receivable 0 (321,860)
Payments Collected on Notes Receivable 55,395 15,669
Acquisition of Equipment 0 (42,700)
Cash Paid in Connection with Acquisitions 0 (116,835)
Increase in Other Assets (130) 0
------------- -------------
Cash Expended on Investing Activities 55,265 (465,726)
Net Increase (Decrease) in Cash (62,044) 12,134
Cash & Cash Equivalents-Beginning 310,578 427,420
------------- -------------
Cash & Cash Equivalents-Ending $ 248,534 $ 439,554
============= =============
</TABLE>
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not
misleading.
4
<PAGE>
Jreck Subs Group, Inc.
Notes to Interim Financial Statements
Form 10-QSB
March 31, 1999
Note 1. The interim financial statements include all adjustments which, in the
opinion of management, are necessary in order to make the financial statements
not misleading. The unaudited consolidated financial statements and notes are
presented as permitted by form 10-QSB. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The
accompanying consolidated financial statements and notes should be read in
conjunction with the audited financial statements and notes of the Company for
the year ended December 31, 1998. The results of operations for the three-month
period ended March 31, 1999 are not necessarily indicative of those to be
expected for the entire year.
Note 2. Between January 1999 and March 1999, shareholders holding 320 shares of
the Company's Series "D" preferred stock with a value of $511,055 converted
their shares into 2,531,901 shares of the Company's common stock. These same
Series "D" preferred shareholders also received 216,618 shares of the Company's
common stock as payment for accrued dividends of $27,849.
Note 3. In February 1999, the Company completed an offering of Series "E"
Convertible Preferred Stock. The aggregate offering of 20 shares at $10,000 per
share of $200,000 was used to fund current operations.
5
<PAGE>
Item 2. Management's Discussion and Analysis.
Forward Looking Statements
The following discussion contains certain forward-looking statements subject to
the safe harbor created by the "Private Securities Litigation Reform Act of
1995". These statements use such words as "may," "will," "expect," "believe,"
"plan," "anticipate" and other similar terminology. These statements reflect
management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to changes in global
and local business and economic conditions; the potential effect on business
from year 2000 issues; legislation and government regulation; competition;
success of operating, initiatives including advertising and promotional efforts;
changes in food, labor and other operating costs; availability and cost of land
and construction; adoption of new or changes in accounting policies and
practices; changes in consumer preferences, spending patterns and demographic
trends and changes in the political or economic climate.
Overview
The Company derives its revenue from several sources: royalties, franchise fees
and other franchise related activities as well as a bakery acquired to supply
sandwich rolls to certain franchisees. All company owned restaurants were
disposed by the end of 1998 by selling or transferring them to new or existing
franchisees. The Company has approximately 270 franchised units at March 31,
1999.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Results of Operations
The results of operations for the three months ended March 31, 1999
reflect no retail sales as all company owned restaurants were disposed by the
end of 1998.
The Company had a net loss of $640,750 for the three months ended March
31, 1999 compared to a net loss of $1,551,084 for the same period in 1998. The
decrease in the net loss is primarily from the result of a one time charge of
$718,272 incurred during the three months ended March 31, 1998 due to a penalty
feature imposed on the Company's Series "D" preferred stock issued January 5,
1998 and a decrease of $584,311 in consulting and investor relation expenses
incurred in connection with the Company's business expansion activities in 1998.
These items were reflected in a loss per share of $0.03 for the three months
ended March 31, 1999 compared to a loss per share of $0.11 for the same period
in 1998.
Total revenues decreased $604,473 or 38.9% to $950,827 for the three
months ended March 31, 1999 compared to $1,555,300 for the same period in 1998.
$531,597 of this decrease is the result of the sale of all corporately owned
restaurants by the end of 1998. Revenues from bakery sales were $160,079 for the
three months ended March 31, 1999 compared to $250,421 for the same period in
1998, a decrease of $90,342. The decrease is attributable to the Company closing
its Tampa bakery in 1998 which generated sales of $62,425 prior to its closing.
Royalties increased $85,367 or 15.6% to $632,508 for the three months ended
March 31, 1999 compared to $547,141 for the same period in 1998. The increase is
primarily from a full three month's operations from the Li'l Dino chain in 1999
compared to less than a month's operations in 1998. The increase in royalties
from the Li'l Dino chain was approximately $97,000.
6
<PAGE>
Total expenses decreased $1,554,413 or 50.0% to $1,551,971 for the
three months ended March 31, 1999 compared to $3,106,384 for the same period in
1998. The decrease is primarily due to a conversion penalty of $718,272 in 1998
on the Company's Series "D" preferred stock and reduced consulting and investor
relation expenses in 1999. Consulting and investor relation expenses decreased
$584,311 or 75.9% to $185,738 for the three months ended March 31, 1999 compared
to $770,049 for the same period in 1998. The 1998 amount included business
expansion expenses in connection with the Company's acquisition activities and
capital raising costs on the Company's Series "D" preferred stock. General and
administrative expenses decreased $121,140 or 12.4% to $854,642 for the three
months ended March 31, 1999 compared to $975,782 for the same period in 1998,
primarily from the Company streamlining its corporate operations. Interest
expense increased $69,630 or 105.0% to $135,947 for the three months ended March
31, 1999 compared to $66,317 for same period in 1998, primarily due to $76,694
in increased amortization of the Company's deferred loan costs.
Liquidity and Capital Resources
Net cash used in operating activities was $304,155 for the three months
ended March 31, 1999 compared to net cash used in operating activities of
$929,202 for the comparable period in 1998. The decrease in cash used in
operating activities is primarily attributable to a reduction in accounts
payable and accrued expenses of $99,261 for the three months ended March 31,
1999 compared to $975,372 for the same period in 1998. The 1998 reduction was
made possible from the issuance of the Company's Series "D" preferred stock
which proceeds were used in part to pay off accounts payable and accrued
expenses for costs incurred in 1997 in connection with the Company's acquisition
and capital raising activities.
Net cash of $186,846 was provided by financing activities for the three
months ended March 31, 1999 compared to net cash provided of $1,407,062 for the
comparable period in 1998. The 1999 amount reflects $200,000 raised through the
issuance of the Company's Series "E" preferred stock. The 1998 amount was a
result of $1,817,490 raised through the successful offering of the Company's
Series "D" preferred stock.
Net cash provided by investing activities was $55,265 for the three
months ended March 31, 1999 compared to net cash used in investing activities of
$465,726 for the comparable period in 1998. The 1998 amount reflects $116,835 of
cash paid in connection with acquisitions and an increase of $321,860 in notes
receivable.
Working capital deficit at March 31, 1999 was $2,750,647 compared with
a deficit of $2,157,280 at December 31, 1998, an increase in deficit of
$593,367. The increase in deficit is primarily attributable to an additional
$497,000 of the Company's long-term debt maturing within a year.
The Company believes that cash flow from operations and collections
from notes receivable will continue to fund its operations as well as generate a
portion of the capital necessary to meet the Company's obligations on its long
term debt. The Company intends to seek other sources of financing, restructure
and/or pay off some of its long term debt. There is no assurance that additional
funding will be available, or that if available, it can be obtained on terms
favorable to the Company. Failure to obtain such funding could adversely affect
the Company's financial condition.
7
<PAGE>
Impact of Year 2000
The Company's business and relationships with it business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks. The failure of any
of these programs, systems or networks to successfully address the Year 2000
rollover problem could have a material adverse effect on the Company's business,
financial condition or results of operations. Many installed computer software
and network processing systems currently accept only two digit entries in the
date code field and may need to be upgraded or replaced in order to accurately
record and process information and transactions on or after January 1, 2000.
The Company utilizes personal computers (PC's) at all its employee
workstations, some of which are connected to a network while others are
stand-alone units. These personal computers all utilize Microsoft Windows or
Microsoft Windows NT as their operating system. The Company believes that the
Windows version found on all its computers is Year 2000 compliant. Additionally,
the Company recently acquired and updated software to operate all its accounting
functions. The Company believes this new software, the system in which it runs
and its computer hardware to be Year 2000 compliant. Management anticipates that
all accounting functions will be performed using Year 2000 compliant software by
June of 1999. The costs of acquiring and implementing the software are expected
to be minimal. Management believes that any additional expenditures required to
implement this software will be funded from the cash flow generated by
operations.
The Company primarily does business with its subfranchisors and its
franchisees who in turn deal with retail customers and food distribution
companies. The Company has considered the transactions it conducts with its
subfranchisors and its franchisees in its analysis of the Year 2000 issue, and
believes that it has completed substantially all modifications to the computer
systems used in these transactions to ensure the systems are Year 2000
compliant. The Company is not certain as whether the computer software and
business systems of its franchisees' suppliers are Year 2000 compliant. The
failure or delay of these distributors to successfully address the Year 2000
issue may result in delays in placing or receiving orders for goods and services
at the restaurant level. Such delays may result in lost revenues for the
franchisees and, in turn, lower continuing royalties to the Company. The Company
anticipates that such delays and lost revenues, if any, would be minimal.
An inventory and assessment of all non-information technology systems
(such as telephone systems, fax machines and copiers) has not been completed.
The Company does not believe that the failure of such systems will have a
significant impact on its ability to conduct business. If a year 2000 failure
should occur in any of these systems, management intends to resort to
traditional hand methods until such failure can be cured.
The Company intends to continue to monitor its Year 2000 compliance and
to correct any noncompliance as it is discovered. Management will fund such
efforts out of operating cash flow. The Company believes that the effects on any
noncompliance on its part, or by its customers and suppliers, will not have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
8
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
On August 2, 1999, shareholders of Li'l Dino Management Corporation
filed a complaint against the Company and some of its officers in Civil Action
Number 1:99-CV631 in the United States District Court for the Middle District of
North Carolina, Greensboro Division. The Company was served with this complaint
on August 5, 1999. This complaint alleges damages of $4.5 million for securities
fraud, misappropriation of corporate opportunities and negligent
misrepresentation, and seeks treble damages, interest and attorney's fees. The
allegations in the complaint relate to the Company's acquisition of
substantially all of the assets of Li'l Dino Management.
The Company believes that the claims made in the complaint are without
merit. The Company intends to defend itself vigorously in this matter.
Item 2. Changes in Securities and Use of Proceeds.
The following table sets forth information with respect to the sale or issuance
of unregistered securities by the Company between January 1, 1999 to March 31,
1999:
<TABLE>
<CAPTION>
Exempt From
1933 Act
Shares Type of Value of Registration In
Issued Security Consideration To Whom Issued Business Purpose Reliance of:
<S> <C> <C> <C> <C> <C>
2,531,901 Common 511,055 Preferred "D" Shareholders Conversion of 320 Shares of Preferred "D" Section 4(2)
216,618 Common 27,849 Preferred "D" Shareholders Dividends on Preferred "D" Section 4(2)
20 Preferred "E" 200,000 5 Individual Investors Cash Investment Section 4(2)
</TABLE>
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
9
<PAGE>
SIGNATURES
In accordance with all the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Jreck Subs Group, Inc.
- -------------------------
(Registrant)
President & Duly
09/17/99 Christopher M. Swartz Authorized Officer /s/ Christopher M. Swartz
- -------- --------------------- ------------------ -------------------------
Date Print Name Title Signature
Chief Financial
Officer & Principal
09/17/99 Michael E. Cronin Accounting Officer /s/ Michael E. Cronin
- -------- --------------------- ------------------- -------------------------
Date Print Name Title Signature
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 248,534
<SECURITIES> 0
<RECEIVABLES> 377,610
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,537,802
<PP&E> 1,056,338
<DEPRECIATION> (250,223)
<TOTAL-ASSETS> 14,092,048
<CURRENT-LIABILITIES> 4,288,449
<BONDS> 0
0
3,704,719
<COMMON> 26,764,242
<OTHER-SE> (4,187,500)
<TOTAL-LIABILITY-AND-EQUITY> 14,092,048
<SALES> 950,827
<TOTAL-REVENUES> 950,827
<CGS> 162,409
<TOTAL-COSTS> 1,253,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,947
<INCOME-PRETAX> (640,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (640,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (640,750)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
